Europe funds review – what’s next for European stock markets?

2024 has seen plenty of global political uncertainty and change, and we’re likely to see more.

Since our last Europe sector review in June, Labour won the UK General Election, while Joe Biden announced he would step down as the US Democratic presidential candidate.

In Europe, France took to the polls after President Emmanual Macron announced a snap election, and Germany held regional elections.

Here’s a closer look at what’s happened in Europe over the past three months and how stock markets have reacted.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

Vive La France?

Earlier this summer, French President Emmanuel Macron called a snap election and held two rounds of voting.

Macron’s centrist coalition lost seats, and neither party on the left or right won enough seats to claim a majority.

Believe it or not, France hosted a full Olympic Games between the election and finally announcing the next prime minister of France.

In early September, Macron named Michel Barnier as the new prime minister. Barnier will now attempt to form a government, though we don’t know exactly what that will look like yet. He’s a centre-right politician, and known throughout Europe, particularly as he was the Brexit negotiator for the EU.

The appointment couldn’t come soon enough as the economy is struggling and negotiations need to start for the French budget that’s due by the end of September.

France is under pressure to control its public spending after it revealed at the start of this year that its deficit is bigger than expected. The uncertainty is likely to drag on for some time yet.

Elsewhere, in Germany, the states of Thuringia and Saxony held regional parliamentary elections. In both states the AfD (Alternative for Germany), a hard-right party, gained momentum. It led the polls in Thuringia and came second in Saxony.

This is the first time a far-right party has won a state poll in Germany’s post-war history.

Meanwhile, the centre-right CDU (Christian Democratic Union) took the lead in Saxony and second place in Thuringia.

On the face of it, this looks damaging for German Chancellor Olaf Scholz’s coalition, as it means the Social Democrats, Greens and Liberals sit lower in the polls. That said, the voting only reflects two of Germany’s 16 states, and these states don’t have huge populations.

The outcome didn’t lead to much volatility in markets, which could mean the result was largely expected. However, it does show that politics remain fragmented across many countries, which could lead to tough decision and policy making in future.

ECB cuts rates to 3.5%

In September, the European Central Bank (ECB) cut interest rates by 0.25% to 3.50%. This came off the back of lower inflation and signs that economic risks are abating. Eurozone inflation slowed to a three-year low of 2.20% in August.

Christine Lagarde, President of the ECB, suggested more rate cuts are to come, but another one is unlikely as soon as October’s policy meeting.

While the ECB forecasts growth of 0.8% for 2024, this is down from 0.9% in June. It reduced its forecast for 2025 from 1.5% to 1.4% due to the potential for more subdued domestic demand. Services inflation is also still high compared with things like food and energy prices.

How have European stock markets performed?

European stock markets have performed well over the past year (in sterling terms, to the end of August 2024).

The broader European stock market, as measured by the MSCI Europe ex UK index, grew 15.82%*. The broader global market, the MSCI AC World index, has done better, growing 19.55% over the same time. As always though, past performance isn’t a guide to future returns.

The global stock market has benefited from its large allocation to the US, in particular large tech companies, which have performed well over the past year.

But stock market growth from Europe shouldn’t be dismissed – this is still an impressive annual return, and don’t forget that different markets and sectors will come in and out of favour.

Looking at countries individually, the top two European markets were the Danish and Swedish markets, up 30.09% and 28.08%, respectively.

In Denmark, pharmaceutical company Novo Nordisk, which makes up over two-thirds of its market, performed well thanks to the popularity of its diabetes drugs in the US.

Swedish healthcare and pharmaceutical companies also performed well, as did technology.

European smaller companies haven’t performed as well as larger companies over the year, but the MSCI Europe ex UK Small Cap Index still made 13.05%.

Investor sentiment, the outlook for economic growth, and higher interest rates can all have a greater impact on smaller companies that might have a less certain future compared with bigger businesses.

The average fund in the IA European Smaller Companies peer group didn’t perform quite as well as the index, returning 11.78% over the same time.

The weakest major market was France, which has struggled in recent months due to the political uncertainty and concerns over its high debt levels.

The market could remain volatile while the uncertainties persist, but there’s also the potential for improvement once things settle and if the market views the new budget positively. There are no guarantees though.

How have European Wealth Shortlist funds performed?

All European Wealth Shortlist funds have delivered a positive return over the past year, though the level of performance is mixed. We usually expect this. A range of managers with different strengths, styles and areas of focus will perform differently in different economic conditions.

Remember, past performance isn’t a guide to the future, and performance here is over a short time. All investments fall as well as rise in value, so you could get back less than you invest.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

CT European Select

Barings Europe Select Trust